Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(MARK ONE)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-09318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter) 
 
Delaware
 
13-2670991
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One Franklin Parkway, San Mateo, CA
 
94403
(Address of principal executive offices)
 
(Zip Code)
(650) 312-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    o  NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  YES    o  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     x
  
Accelerated filer     o
Non-accelerated filer  o  (Do not check if a smaller reporting company)
  
Smaller reporting company    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding: 565,321,260 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of January 20, 2017.

Table of Contents


INDEX TO FORM 10-Q
 
 
Page
Financial Information
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
3
 
 
4
 
 
5
 
 
6
 
 
7
 
Item 2.
20
 
Item 3.
41
 
Item 4.
42
 
 
 
 
Other Information
 
 
Item 1.
42
 
Item 1A.
42
 
Item 2.
42
 
Item 6.
43
 
 
 
 
44
45


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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
 
 
Three Months Ended
December 31,
(in millions, except per share data)
 
2016
 
2015
Operating Revenues
 
 
 
 
Investment management fees
 
$
1,063.2

 
$
1,186.7

Sales and distribution fees
 
419.3

 
478.4

Shareholder servicing fees
 
56.6

 
61.9

Other
 
21.7

 
31.0

Total operating revenues
 
1,560.8

 
1,758.0

Operating Expenses
 
 
 
 
Sales, distribution and marketing
 
520.0

 
588.6

Compensation and benefits
 
311.5

 
342.5

Information systems and technology
 
51.7

 
51.2

Occupancy
 
29.1

 
30.7

General, administrative and other
 
61.6

 
91.4

Total operating expenses
 
973.9

 
1,104.4

Operating Income
 
586.9

 
653.6

Other Income (Expenses)
 
 
 
 
Investment and other income, net
 
46.1

 
30.5

Interest expense
 
(13.3
)
 
(12.0
)
Other income, net
 
32.8

 
18.5

Income before taxes
 
619.7

 
672.1

Taxes on income
 
200.9

 
209.7

Net income
 
418.8

 
462.4

Less: net income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
2.1

 
13.6

Redeemable noncontrolling interests
 
(23.5
)
 
1.0

Net Income Attributable to Franklin Resources, Inc.
 
$
440.2

 
$
447.8

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
0.77

 
$
0.74

Diluted
 
0.77

 
0.74

Dividends Declared per Share
 
$
0.20

 
$
0.18














See Notes to Condensed Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in millions)
 
Three Months Ended
December 31,
 
2016
 
2015
Net Income
 
$
418.8

 
$
462.4

Other Comprehensive Income (Loss)
 
 
 
 
Net unrealized losses on investments, net of tax
 
(2.4
)
 
(5.9
)
Currency translation adjustments, net of tax
 
(60.9
)
 
(23.6
)
Net unrealized gains on defined benefit plans, net of tax
 
—

 
0.6

Total other comprehensive loss
 
(63.3
)
 
(28.9
)
Total comprehensive income
 
355.5

 
433.5

Less: comprehensive income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
2.1

 
13.6

Redeemable noncontrolling interests
 
(23.5
)
 
1.0

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
376.9

 
$
418.9






































See Notes to Condensed Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(in millions, except share and per share data)
 
December 31,
2016
 
September 30,
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
8,223.6

 
$
8,247.1

Receivables
 
930.0

 
794.3

Investments (including $521.6 and $1,437.6 at fair value at December 31, 2016 and September 30, 2016)
 
1,512.8

 
2,416.6

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
231.2

 
236.2

Investments, at fair value
 
2,456.1

 
1,513.4

Property and equipment, net
 
512.5

 
523.2

Goodwill and other intangible assets, net
 
2,200.4

 
2,211.3

Other
 
143.7

 
156.7

Total Assets
 
$
16,210.3

 
$
16,098.8

 
 
 
 
 
Liabilities
 
 
 
 
Compensation and benefits
 
$
191.8

 
$
357.4

Accounts payable and accrued expenses
 
214.8

 
233.3

Dividends
 
114.6

 
104.6

Commissions
 
292.4

 
302.0

Income taxes
 
191.7

 
23.0

Debt
 
1,394.4

 
1,401.2

Debt of consolidated sponsored investment products
 
340.1


682.2

Deferred taxes
 
151.7

 
161.5

Other
 
230.6

 
244.3

Total liabilities
 
3,122.1

 
3,509.5

Commitments and Contingencies (Note 9)
 

 

Redeemable Noncontrolling Interests
 
841.2

 
61.1

Stockholders’ Equity
 
 
 
 
Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued
 
—

 
—

Common stock, $0.10 par value, 1,000,000,000 shares authorized; 565,683,547 and 570,345,156 shares issued and outstanding at December 31, 2016 and September 30, 2016
 
56.6

 
57.0

Retained earnings
 
12,326.0

 
12,226.2

Accumulated other comprehensive loss
 
(417.8
)
 
(347.4
)
Total Franklin Resources, Inc. stockholders’ equity
 
11,964.8

 
11,935.8

Nonredeemable noncontrolling interests
 
282.2

 
592.4

Total stockholders’ equity
 
12,247.0

 
12,528.2

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
16,210.3

 
$
16,098.8







See Notes to Condensed Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
 
 
Three Months Ended
December 31,
(in millions)
 
2016
 
2015
Net Income
 
$
418.8

 
$
462.4

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
17.1

 
22.8

Depreciation and other amortization
 
19.9

 
22.6

Stock-based compensation
 
30.4

 
34.0

Gains on sale of assets
 
(0.8
)
 
(7.2
)
Income from investments in equity method investees
 
(34.2
)
 
(24.8
)
Net losses (gains) on other investments of consolidated sponsored investment products
 
(2.0
)
 
7.6

Deferred income taxes
 
(6.9
)
 
(1.8
)
Other
 
(12.1
)
 
14.9

Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(19.3
)
 
(42.5
)
Decrease in trading securities, net
 
27.9

 
1.5

Decrease (increase) in trading securities of consolidated sponsored investment products, net
 
43.9

 
(102.5
)
Decrease in accrued compensation and benefits
 
(161.9
)
 
(221.5
)
Decrease in commissions payable
 
(9.6
)
 
(23.8
)
Increase in income taxes payable
 
167.1

 
160.4

Decrease in other liabilities
 
(32.1
)
 
(6.9
)
Net cash provided by operating activities
 
446.2

 
295.2

Purchase of investments
 
(28.8
)
 
(20.9
)
Liquidation of investments
 
35.2

 
128.3

Purchase of other investments by consolidated sponsored investment products
 
(69.4
)
 
(91.6
)
Liquidation of other investments by consolidated sponsored investment products
 
72.7

 
104.7

Additions of property and equipment, net
 
(12.8
)
 
(19.1
)
Adoption of new accounting guidance
 
(49.2
)
 
—

Net deconsolidation of sponsored investment products
 
(6.1
)
 
(12.2
)
Net cash provided by (used in) investing activities
 
(58.4
)
 
89.2

Dividends paid on common stock
 
(103.4
)
 
(91.5
)
Repurchase of common stock
 
(256.2
)
 
(381.5
)
Proceeds from debt of consolidated sponsored investment products
 
0.4

 
1.0

Payments on debt by consolidated sponsored investment products
 
(3.2
)
 
(27.9
)
Payments on contingent consideration liability
 
(2.2
)
 
(2.8
)
Noncontrolling interests
 
(1.3
)
 
39.3

Net cash used in financing activities
 
(365.9
)
 
(463.4
)
Effect of exchange rate changes on cash and cash equivalents
 
(50.4
)
 
(20.1
)
Decrease in cash and cash equivalents
 
(28.5
)
 
(99.1
)
Cash and cash equivalents, beginning of period
 
8,483.3

 
8,368.1

Cash and Cash Equivalents, End of Period
 
$
8,454.8

 
$
8,269.0

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
33.1

 
$
48.1

Cash paid for interest
 
10.1

 
8.8

Cash paid for interest by consolidated sponsored investment products
 
3.3

 
6.7

See Notes to Condensed Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
Note 1 – Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission. Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. These financial statements should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended September 30, 2016 (“fiscal year 2016”). Certain comparative amounts for the prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended December 31, 2016.
Note 2 – New Accounting Guidance
Recently Adopted Accounting Guidance
On October 1, 2016, the Company adopted an amendment to the consolidation guidance issued by the Financial Accounting Standards Board (“FASB”) using the modified retrospective approach which did not require the restatement of prior year periods. The amendment modifies the consolidation framework for certain investment entities and all limited partnerships. It also eliminates certain criteria used to determine whether fees paid to a decision maker are a variable interest and results in a lower consolidation threshold for variable interest entities (“VIEs”). The adoption caused the consolidation of 24 sponsored investment products (“SIPs”) that changed from voting interest entities (“VOEs”) to VIEs and three other SIPs that are VIEs. In addition, two collateralized loan obligations (“CLOs”) for which the Company was previously the primary beneficiary and five limited partnerships were deconsolidated. The adoption resulted in net increases in total assets, redeemable noncontrolling interests and retained earnings of $180.9 million, $824.7 million and $5.8 million, and net decreases in total liabilities, nonredeemable noncontrolling interests and other equity of $317.9 million, $324.6 million and $7.1 million as of October 1, 2016.
Accounting Guidance Not Yet Adopted
The FASB issued an amendment to the existing stock-based compensation guidance in March 2016. The amendment requires all income tax effects of stock-based awards to be recognized as income tax expense when the awards vest or settle and clarifies the classification of these transactions within the statement of cash flows. The amendment also provides an election to account for forfeitures as they occur, which the Company expects to take. The amendment is effective for the Company on October 1, 2017 and requires varying transition approaches for the different changes to the guidance. The Company expects the adoption to increase the volatility of income tax expense as a result of fluctuations in its stock price.
The FASB issued new guidance in May 2014 that requires use of a single principles-based model for recognition of revenue from contracts with customers. The core principle of the model is that revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. The guidance also changes the accounting for certain contract costs and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The guidance is effective for the Company on October 1, 2018 and allows for either a full retrospective or modified approach at adoption. While the Company’s implementation efforts are ongoing, it does not expect adoption of the guidance to have a significant impact on the timing of recognition for the majority of its operating revenue. The Company is evaluating certain costs to determine if they should be capitalized or expensed based on the criteria in the guidance for costs to obtain or fulfill a contract. Additionally, it is assessing certain arrangements to determine whether it continues to act as a principal and present the related revenue gross of associated expenses. The overall impact upon adoption may differ based on further evaluation and additional facts and circumstances identified during implementation. The Company has not yet determined its transition approach.

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The FASB issued an amendment to the existing financial instruments guidance in January 2016. The amendment requires substantially all equity investments in nonconsolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting, which will impact all equity securities currently classified as available-for-sale. The amendment also provides an election to measure equity investments that do not have a readily determinable fair value at cost less impairment, if any, which the Company expects to take. The amendment is effective for the Company on October 1, 2018 and requires a cumulative effect adjustment to retained earnings at adoption. The Company does not expect the adoption to have a material impact on its consolidated financial statements; however, this could be affected by market volatility as well as additional facts and circumstances identified during implementation.
There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for fiscal year 2016.
Note 3 – Stockholders’ Equity
Changes in total stockholders’ equity were as follows:
(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the three months ended December 31, 2016
 
 
 
Balance at October 1, 2016
 
$
11,935.8

 
$
592.4

 
$
12,528.2

Adoption of new accounting guidance
 
(1.3
)
 
(324.6
)
 
(325.9
)
Net income
 
440.2

 
2.1

 
442.3

Other comprehensive loss
 
(63.3
)
 
 
 
(63.3
)
Cash dividends declared on common stock
 
(113.4
)
 
 
 
(113.4
)
Repurchase of common stock
 
(261.7
)
 
 
 
(261.7
)
Net subscriptions
 
 
 
12.3

 
12.3

Stock-based compensation
 
28.5

 
 
 
28.5

Balance at December 31, 2016
 
$
11,964.8

 
$
282.2

 
$
12,247.0

(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the three months ended December 31, 2015
 
 
 
Balance at October 1, 2015
 
$
11,841.0

 
$
654.8

 
$
12,495.8

Net income
 
447.8

 
13.6

 
461.4

Other comprehensive loss
 
(28.9
)
 
 
 
(28.9
)
Cash dividends declared on common stock
 
(107.6
)
 
 
 
(107.6
)
Repurchase of common stock
 
(404.1
)
 
 
 
(404.1
)
Net distributions
 
 
 
(28.7
)
 
(28.7
)
Stock-based compensation
 
33.0

 
 
 
33.0

Balance at December 31, 2015
 
$
11,781.2

 
$
639.7

 
$
12,420.9

During the three months ended December 31, 2016 and 2015, the Company repurchased 7.1 million and 10.5 million shares of its common stock at a cost of $261.7 million and $404.1 million under its stock repurchase program. At December 31, 2016, 43.6 million shares remained available for repurchase under the program, which is not subject to an expiration date.

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Note 4 – Earnings per Share
The components of basic and diluted earnings per share were as follows: 
(in millions, except per share data)
 
Three Months Ended
December 31,
 
2016
 
2015
Net income attributable to Franklin Resources, Inc.
 
$
440.2

 
$
447.8

Less: allocation of earnings to participating nonvested stock and stock unit awards
 
3.0

 
2.7

Net Income Available to Common Stockholders
 
$
437.2

 
$
445.1

 
 
 
 
 
Weighted-average shares outstanding – basic
 
565.1

 
597.6

Dilutive effect of nonparticipating nonvested stock unit awards
 
0.1

 
0.1

Weighted-Average Shares Outstanding – Diluted
 
565.2

 
597.7

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
0.77

 
$
0.74

Diluted
 
0.77

 
0.74

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 0.7 million and 1.4 million for the three months ended December 31, 2016 and 2015.
Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated SIPs. See Note 7 – Consolidated Sponsored Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions)
 
December 31,
2016
 
September 30,
2016
Investment securities, trading
 
 
 
 
SIPs
 
$
138.8

 
$
844.4

Debt and other equity securities
 
264.2

 
277.5

Total investment securities, trading
 
403.0

 
1,121.9

Investment securities, available-for-sale
 
 
 
 
SIPs
 
102.3

 
297.7

Debt and other equity securities
 
3.0

 
3.7

Total investment securities, available-for-sale
 
105.3

 
301.4

Investments in equity method investees
 
816.0

 
797.4

Other investments
 
188.5

 
195.9

Total
 
$
1,512.8

 
$
2,416.6

Debt and other equity trading securities consist primarily of corporate debt.
Investment securities with an aggregate carrying amount of $117.3 million were pledged as collateral at both December 31, 2016 and September 30, 2016.
Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:
(in millions)
 
 
 
Gross Unrealized
 
 
as of December 31, 2016
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
103.2

 
$
1.0

 
$
(1.9
)
 
$
102.3

Debt and other equity securities
 
2.9

 
0.1

 
—

 
3.0

Total
 
$
106.1

 
$
1.1

 
$
(1.9
)
 
$
105.3


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Table of Contents

(in millions)
 
 
 
Gross Unrealized
 
 
as of September 30, 2016
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
289.6

 
$
13.7

 
$
(5.6
)
 
$
297.7

Debt and other equity securities
 
3.6

 
0.1

 
—

 
3.7

Total
 
$
293.2

 
$
13.8

 
$
(5.6
)
 
$
301.4

Gross unrealized losses relating to investment securities, available-for-sale aggregated by length of time that individual securities have been in a continuous unrealized loss position were as follows:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in millions)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of December 31, 2016
 
 
 
 
 
SIPs
 
$
19.5

 
$
(1.1
)
 
$
5.2

 
$
(0.8
)
 
$
24.7

 
$
(1.9
)
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in millions)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of September 30, 2016
 
 
 
 
 
SIPs
 
$
75.8

 
$
(4.3
)
 
$
18.0

 
$
(1.3
)
 
$
93.8

 
$
(5.6
)
The Company recognized $0.3 million and $0.4 million of other-than-temporary impairment during the three months ended December 31, 2016 and 2015.
Note 6 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated SIPs. See Note 7 – Consolidated Sponsored Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liability measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of December 31, 2016
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
SIPs
 
$
138.8

 
$
—

 
$
—

 
$
138.8

Debt and other equity securities
 
3.1

 
75.7

 
185.4

 
264.2

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
102.3

 
—

 
—

 
102.3

Debt and other equity securities
 
0.9

 
2.1

 
—

 
3.0

Life settlement contracts
 
—

 
—

 
13.3

 
13.3

Total Assets Measured at Fair Value
 
$
245.1

 
$
77.8

 
$
198.7

 
$
521.6

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
83.7

 
$
83.7


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Table of Contents

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2016
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
SIPs
 
$
844.4

 
$
—

 
$
—

 
$
844.4

Debt and other equity securities
 
2.6

 
84.1

 
190.8

 
277.5

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
297.7

 
—

 
—

 
297.7

Debt and other equity securities
 
1.6

 
2.1

 
—

 
3.7

Life settlement contracts
 
—

 
—

 
14.3

 
14.3

Total Assets Measured at Fair Value
 
$
1,146.3

 
$
86.2

 
$
205.1

 
$
1,437.6

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
98.1

 
$
98.1

The fair values of all SIPs and certain other equity securities are determined based on their published net asset values and they are classified as Level 1. The fair values of certain debt and other equity securities are determined using quoted market prices, if available, or independent third-party broker or dealer price quotes, which are evaluated for reasonableness, and they are classified as Level 2. The fair values of other debt securities and all life settlement contracts are determined using discounted cash flow valuation techniques using significant unobservable inputs and they are classified as Level 3.
The fair value of the contingent consideration liability, which is classified as Level 3, is determined using an income-based method which considers the net present value of anticipated future cash flows.
There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three months ended December 31, 2016 and 2015.
Changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
 
 
2016
 
2015
(in millions)
 
Investments
 
Contingent
Consideration
Liability
 
Investments
 
Contingent
Consideration
Liability
for the three months ended December 31,
 
 
 
 
Balance at beginning of period
 
$
205.1

 
$
(98.1
)
 
$
20.7

 
$
(102.9
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
0.6

 
—

 
0.6

 
—

Included in general, administrative and other expense
 
—

 
12.2

 
—

 
(16.2
)
Purchases
 
0.5

 
—

 
3.3

 
—

Sales
 
(2.4
)
 
—

 
—

 
—

Settlements
 
(1.7
)
 
2.2

 
(0.8
)
 
3.3

Foreign exchange revaluation
 
(3.4
)
 
—

 
—

 
—

Balance at End of Period
 
$
198.7

 
$
(83.7
)
 
$
23.8

 
$
(115.8
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
(0.1
)
 
$
12.2

 
$
0.2

 
$
(16.2
)

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Table of Contents

Valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2016
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
185.4

 
Discounted cash flow
 
Discount rate
 
6.5%–6.9% (6.8%)
 
 
 
Risk premium
 
2.0%–17.9% (16.7%)
 
 
 
Liquidity discount
 
0.0%–10.0% (9.7%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
13.3

 
Discounted cash flow
 
Life expectancy
 
21–130 months (65)
Discount rate
 
8.0%–20.0% (13.0%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
83.7

 
Discounted cash flow
 
AUM growth rate
 
(1.9)%–2.8% (0.7%)
EBITDA margin
 
6.2%–8.8% (7.9%)
Discount rate
 
13.2%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2016
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
190.8

 
Discounted cash flow
 
Discount rate
 
3.6%–6.9% (6.7%)
 
 
 
Risk premium
 
2.0%–17.9% (16.5%)
 
 
 
 
 
Liquidity discount
 
0.0%–10.0% (9.6%)
 
 
 
 
 
 
 
 
Life settlement contracts
 
14.3

 
Discounted cash flow
 
Life expectancy
 
20–132 months (65)
Discount rate
 
3.3%–18.0% (11.5%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
98.1

 
Discounted cash flow
 
AUM growth rate
 
2.4%–11.5% (5.9%)
EBITDA margin
 
14.3%
Discount rate
 
13.2%
For investment securities, trading – debt and other equity securities, a significant increase (decrease) in the discount rate, risk premium or liquidity discount in isolation would result in a significantly lower (higher) fair value measurement.
For life settlement contracts, a significant increase (decrease) in the life expectancy or the discount rate in isolation would result in a significantly lower (higher) fair value measurement.
For the contingent consideration liability, a significant increase (decrease) in the AUM growth rate or EBITDA margin, or decrease (increase) in the discount rate, in isolation would result in a significantly higher (lower) fair value measurement.
Financial instruments that were not measured at fair value were as follows:
(in millions)
 
 
 
December 31, 2016
 
September 30, 2016
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
8,223.6

 
$
8,223.6

 
$
8,247.1

 
$
8,247.1

Other investments
 
 
 
 
 
 
 
 
 
 
Time deposits
 
2
 
128.0

 
128.0

 
131.6

 
131.6

Cost method investments
 
3
 
47.2

 
59.5

 
50.0

 
61.3

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt
 
 
 
 
 
 
 
 
 
 
Senior notes
 
2
 
1,342.8

 
1,365.1

 
1,348.5

 
1,412.5

Loan
 
2
 
51.6

 
51.5

 
52.7

 
52.7



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Table of Contents

Note 7 – Consolidated Sponsored Investment Products
The Company consolidates SIPs, which consist of both VOEs and VIEs, when it has a controlling financial interest. The Company has a controlling financial interest when it owns a majority of the voting interest in a VOE or when it is the primary beneficiary of a VIE. A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or they do not have defined rights and obligations normally associated with an equity investment. The Company’s VIEs are all investment entities, and its variable interests consist of its equity ownership interest in and certain investment management fees earned from these entities.
The Company adopted new accounting guidance on October 1, 2016 that modifies the consolidation framework for certain investment entities and all limited partnerships. As a result of the modifications, certain SIPs changed from VOEs to VIEs and became subject to a lower threshold for consolidation. Additionally, there is now a single model to determine whether the Company is the primary beneficiary of a VIE. The Company is the primary beneficiary if it has the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. Investment management fees earned from VIEs are excluded from the primary beneficiary determination if they are deemed to be at market and commensurate with service. The key estimates and assumptions used in the analyses include the amount of assets under management (“AUM”), investment management fee rates, the life of the investment product, prepayment rates and the discount rate. The new guidance did not change the consolidation framework for VOEs.
Consolidated SIPs consist of mutual and other investment funds, limited partnerships and similar structures and CLOs, which are asset-backed financing entities collateralized by a pool of corporate debt securities. The Company consolidated 61 SIPs, including one CLO, as of December 31, 2016 and 40 SIPs, including three CLOs, as of September 30, 2016. Amounts for prior periods have been reclassified to combine amounts previously presented separately as consolidated SIPs and consolidated VIEs.
The balances of consolidated SIPs included in the Company’s condensed consolidated balance sheets were as follows:
(in millions)
 
December 31, 2016
 
September 30, 2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
231.2

 
$
236.2

Receivables
 
174.1

 
47.9

Investments, at fair value
 
2,456.1

 
1,513.4

Other assets
 
0.8

 
1.4

Total Assets
 
$
2,862.2

 
$
1,798.9

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
67.9

 
$
65.2

Debt
 
340.1

 
682.2

Other liabilities
 
7.2

 
8.5

Total liabilities
 
415.2

 
755.9

Redeemable Noncontrolling Interests
 
841.2

 
61.1

Stockholders’ Equity
 
 
 
 
Franklin Resources, Inc.’s interests
 
1,349.3

 
414.1

Nonredeemable noncontrolling interests
 
256.5

 
567.8

Total stockholders’ equity
 
1,605.8

 
981.9

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
2,862.2

 
$
1,798.9

The consolidated SIPs did not have a significant impact on net income attributable to the Company during the three months ended December 31, 2016 and 2015.
The Company has no right to the consolidated SIPs’ assets, other than its direct equity investments in them and investment management fees earned from them. The debt holders of the consolidated SIPs have no recourse to the Company’s assets beyond the level of its direct investment, therefore the Company bears no other risks associated with the SIPs’ liabilities.

13
Table of Contents

SIPs are typically consolidated when the Company makes an initial investment in a newly launched investment entity. They are typically deconsolidated when the Company no longer has a controlling financial interest due to redemptions of its investment or increases in third-party investments. The Company’s investments in SIPs subsequent to deconsolidation are accounted for as trading or available-for-sale investment securities, or equity method or cost method investments depending on the structure of the SIP and the Company’s role and level of ownership.
Investments
Investments of consolidated SIPs consisted of the following:
(in millions)
 
December 31,
2016
 
September 30,
2016
Investment securities, trading
 
$
1,810.3

 
$
287.8

Other debt securities
 
366.9

 
618.3

Other equity securities
 
278.9

 
607.3

Total
 
$
2,456.1

 
$
1,513.4

Investment securities, trading consist of equity and debt securities that are traded in active markets. Other debt securities consist of corporate debt securities held by CLOs and debt securities of entities in emerging markets. Other equity securities consist of equity securities of entities in emerging markets and fund products.
Investments in fund products for which fair value was estimated using reported net asset value (“NAV”) as a practical expedient were as follows:
(in millions)
 
Redemption Frequency
 
December 31,
2016
 
September 30,
2016
Real estate and private equity funds
 
Nonredeemable
 
$
146.3

 
$
444.2

Hedge funds
 
Monthly, quarterly or triennially
 
—

 
1.8

Total
 
 
 
$
146.3

 
$
446.0

The investments in real estate and private equity funds are expected to be returned through distributions as a result of liquidations of the funds’ underlying assets over a weighted-average period of 5.2 years and 3.2 years at December 31, 2016 and September 30, 2016. The consolidated SIPs’ unfunded commitments to these funds totaled $2.0 million and $74.4 million at December 31, 2016 and September 30, 2016, of which the Company was contractually obligated to fund $0.4 million and $2.2 million based on its ownership percentage in the SIPs.
Fair Value Measurements
Assets and liabilities of consolidated SIPs measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of December 31, 2016
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents of CLO
 
$
54.8

 
$
—

 
$
—

 
$
—

 
$
54.8

Receivables of CLO
 
—

 
2.0

 
—

 
—

 
2.0

Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
272.2

 
93.5

 
131.6

 
146.3

 
643.6

Debt securities
 
0.2

 
1,687.9

 
124.4

 
—

 
1,812.5

Total Assets Measured at Fair Value
 
$
327.2

 
$
1,783.4

 
$
256.0

 
$
146.3

 
$
2,512.9

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.2

 
$
7.0

 
$
—

 
$
—

 
$
7.2


14
Table of Contents

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of September 30, 2016
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents of CLOs
 
$
146.4

 
$
—

 
$
—

 
$
—

 
$
146.4

Receivables of CLOs
 
—

 
23.6

 
—

 
—

 
23.6

Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
155.4

 
0.5

 
160.3

 
446.0

 
762.2

Debt securities
 
—

 
618.9

 
132.3

 
—

 
751.2

Total Assets Measured at Fair Value
 
$
301.8

 
$
643.0

 
$
292.6

 
$
446.0

 
$
1,683.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.1

 
$
8.4

 
$
—

 
$
—

 
$
8.5

Investments in fund products for which fair value was estimated using NAV as a practical expedient are not classified in the fair value hierarchy. There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three months ended December 31, 2016 and 2015.
Changes in Level 3 assets measured at fair value on a recurring basis were as follows: 
 
 
2016
 
2015
(in millions)
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
for the three months ended December 31,
 
 
 
 
 
Balance at beginning of period
 
$
160.3

 
$
132.3

 
$
292.6

 
$
191.6

 
$
130.2

 
$
321.8

Adoption of new accounting guidance
 
(45.4
)
 
(0.5
)
 
(45.9
)
 
—

 
—

 
—

Realized and unrealized gains (losses) included in investment and other income, net
 
(3.3
)
 
(0.3
)
 
(3.6
)
 
(1.1
)
 
1.1

 
—

Purchases
 
21.0

 
2.2

 
23.2

 
—

 
2.5

 
2.5

Sales
 
(0.1
)
 
(6.4
)
 
(6.5
)
 
—

 
(9.6
)
 
(9.6
)
Foreign exchange revaluation
 
(0.9
)
 
(2.9
)
 
(3.8
)
 
(2.4
)
 
(0.3
)
 
(2.7
)
Balance at End of Period
 
$
131.6

 
$
124.4

 
$
256.0

 
$
188.1

 
$
123.9

 
$
312.0

Change in unrealized gains (losses) included in net income relating to assets held at end of period
 
$
(3.4
)
 
$
(0.2
)
 
$
(3.6
)
 
$
(1.1
)
 
$
0.3

 
$
(0.8
)
Valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2016
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
83.9

 
Market comparable companies
 
EBITDA multiple
 
5.0–14.2 (11.0)
Discount for lack of marketability
50.0%
24.3

Discounted cash flow
Discount rate
5.0%–19.0% (13.7%)
23.4

Market pricing
Price to book value ratio
1.8–2.3 (2.0)
 
 
 
 
 
 
 
 
 
Debt securities
 
112.6

 
Discounted cash flow
 
Discount rate
 
6.0%–50.0% (13.0%)
Risk premium
0.0%–28.0% (9.5%)
 
11.8

 
Market pricing
 
Private sale pricing
 
$57 per $100 of par

15
Table of Contents

(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2016
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
113.1

 
Market comparable companies
 
EBITDA multiple
 
5.0–14.2 (10.3)
Discount for lack of marketability
25.0%–50.0% (36.6%)
24.3

Discounted cash flow
Discount rate
5.0%–19.0% (13.7%)
22.9

Market pricing
Price to book value ratio
1.8–2.3 (2.0)
 
 
 
 
 
 
 
 
 
Debt securities
 
119.7

 
Discounted cash flow
 
Discount rate
 
6.0%–15.0% (10.4%)
Risk premium
0.0%–28.0% (9.7%)
 
 
 
EBITDA multiple
 
5.5
 
12.6

 
Market pricing
 
Private sale pricing
 
$57 per $100 of par
Following are descriptions of the sensitivity of the Level 3 recurring fair value measurements to changes in the significant unobservable inputs presented in the above tables.
For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount for lack of marketability in isolation would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk.
For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the discount rate is accompanied by a directionally similar change in the risk premium. A significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement.
For securities utilizing a market pricing valuation technique, a significant increase (decrease) in the price to book value ratio would result in a significantly higher (lower) fair value measurement.
Financial instruments of consolidated SIPs that were not measured at fair value were as follows:
(in millions)
 
Fair Value
Level
 
December 31, 2016
 
September 30, 2016
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
176.4

 
$
176.4

 
$
89.8

 
$
89.8

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt of CLOs1
 
2 or 3
 
285.5

 
279.4

 
607.2

 
594.5

Other debt
 
3
 
54.6

 
54.3

 
75.0

 
74.6

_________________
1    Substantially all is Level 2.
Debt
Debt of consolidated SIPs consisted of the following:
 
 
December 31, 2016
 
September 30, 2016
(in millions)
 
Amount
 
Effective
Interest
Rate
 
Amount
 
Effective
Interest
Rate
Debt of CLOs
 
$
285.5

 
3.18%
 
$
607.2

 
2.24%
Other debt
 
54.6

 
5.59%
 
75.0

 
4.79%
Total
 
$
340.1

 
 
 
$
682.2

 
 
The debt of CLOs had floating interest rates ranging from 2.38% to 10.36% at December 31, 2016, and from 1.02% to 10.16% at September 30, 2016. The debt matures in fiscal year 2024 at December 31, 2016, and from fiscal years 2018 to 2024 at September 30, 2016.

16
Table of Contents

The other debt had fixed and floating interest rates ranging from 2.36% to 6.38% at December 31, 2016, and from 2.36% to 6.19% at September 30, 2016. The debt maturities ranged from fiscal years 2017 to 2019 at both December 31, 2016 and September 30, 2016.
At December 31, 2016, maturities for debt of consolidated SIPs were as follows: 
(in millions)
 
Carrying Amount
for the fiscal years ending September 30,
2017
 
$
20.8

2018
 
5.8

2019
 
28.0

2020
 
—

2021
 
—

Thereafter
 
285.5

Total
 
$
340.1

Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests of consolidated SIPs were as follows:
(in millions)
 
 
 
 
for the three months ended December 31,
 
2016
 
2015
Balance at beginning of period
 
$
61.1

 
$
59.6

Adoption of new accounting guidance
 
824.7

 
—

Net income (loss)
 
(23.5
)
 
1.0

Net subscriptions (distributions) and other
 
(13.6
)
 
68.0

Net deconsolidations
 
(7.5
)
 
(75.4
)
Balance at End of Period
 
$
841.2

 
$
53.2

Collateralized Loan Obligations
The Company recognized $1.1 million and $0.1 million of net gains related to its own economic interests in the CLOs during the three months ended December 31, 2016 and 2015.
The unpaid principal balance and fair value of the investments of the CLOs were as follows:
(in millions)
 
December 31,
2016
 
September 30,
2016
Unpaid principal balance
 
$
244.3

 
$
496.0

Difference between unpaid principal balance and fair value
 
—

 
(8.2
)
Fair Value
 
$
244.3

 
$
487.8

There were no investments 90 days or more past due at December 31, 2016 or September 30, 2016.
The unpaid principal balance of the debt of the CLOs was $274.9 million and $653.8 million at December 31, 2016 and September 30, 2016.

17
Table of Contents

Note 8 – Nonconsolidated Variable Interest Entities
VIEs for which the Company is not the primary beneficiary consist of SIPs and other investment products in which the Company has an equity ownership interest. The Company’s maximum exposure to loss from these VIEs consists of equity investments and investment management fee receivables as follows: 
(in millions)
 
December 31,
2016
 
September 30,
2016
Investments
 
$
229.9

 
$
77.3

Receivables
 
100.7

 
21.4

Total
 
$
330.6

 
$
98.7

While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching SIPs. The Company also may voluntarily elect to provide its SIPs with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its SIPs during the three months ended December 31, 2016. During fiscal year 2016, the Company purchased $182.7 million of certain debt securities from six SIPs domiciled in India in order to provide additional liquidity to the SIPs. None of these purchases occurred during the three months ended December 31, 2015.
Note 9 – Commitments and Contingencies
Legal Proceedings
On July 28, 2016, a putative class action lawsuit captioned Cryer v. Franklin Resources, Inc., et al. was filed in the United States District Court for the Northern District of California against Franklin, the Franklin Templeton 401(k) Retirement Plan (“Plan”) Investment Committee, and unnamed Investment Committee members. The plaintiff asserts a claim for breach of fiduciary duty under the Employee Retirement Income Security Act, alleging that the defendants selected mutual funds sponsored and managed by the Company (the “Funds”) as investment options for the Plan when allegedly lower-cost and better performing non-proprietary investment vehicles were available. The plaintiff also claims that the total Plan costs, inclusive of investment management and administrative fees, are excessive. The plaintiff alleges that Plan losses exceed $79.0 million and seeks, among other things, damages, disgorgement, rescission of the Plan’s investments in the Funds, attorneys’ fees and costs, and pre- and post-judgment interest. Franklin’s motion to dismiss and motion for summary adjudication were denied on January 17, 2017. Management strongly believes that the claims made in the lawsuit are without merit and intends to defend against them vigorously. Franklin cannot predict with certainty, however, the eventual outcome of the lawsuit or whether it will have a material negative impact on the Company.
The Company is from time to time involved in other litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business, financial position, results of operations or liquidity. In management’s opinion, an adequate accrual has been made as of December 31, 2016 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.
Other Commitments and Contingencies
At December 31, 2016, there were no material changes in the other commitments and contingencies as reported in the Company’s Form 10-K for fiscal year 2016.

18
Table of Contents

Note 10 – Stock-Based Compensation
Stock awards generally entitle holders to the right to sell the underlying shares of the Company’s common stock once the awards vest. Stock unit awards generally entitle holders to receive the underlying shares of common stock once the awards vest. Awards generally vest based on the passage of time or the achievement of predetermined Company financial performance goals. In the event a performance measure is not achieved at or above a specified threshold level, the portion of the award tied to such performance measure is forfeited.
Stock and stock unit award activity was as follows:
(shares in thousands)
 
Time-Based
Shares
 
Performance-
Based Shares
 
Total Shares
 
Weighted-Average
Grant-Date
Fair Value
for the three months ended December 31, 2016
 
 
 
 
Nonvested balance at October 1, 2016
 
2,369

 
1,288

 
3,657

 
$
45.67

Granted
 
2,696

 
1,110

 
3,806

 
34.11

Vested
 
(26
)
 
(353
)
 
(379
)
 
49.71

Forfeited/canceled
 
(114
)
 
(274
)
 
(388
)
 
44.18

Nonvested Balance at December 31, 2016
 
4,925

 
1,771

 
6,696

 
$
38.96

Total unrecognized compensation expense related to nonvested stock and stock unit awards, net of estimated forfeitures, was $197.8 million at December 31, 2016. This expense is expected to be recognized over a remaining weighted-average vesting period of 2.0 years.
Note 11 – Other Income (Expenses)
Other income (expenses) consisted of the following: 
 
 
Three Months Ended
December 31,
(in millions)
 
2016
 
2015
Investment and Other Income, Net
 
 
 
 
Dividend income
 
$
2.4

 
$
2.8

Interest income
 
13.6

 
3.6

Gains (losses) on trading investment securities, net
 
2.0

 
(7.3
)
Realized gains on sale of investment securities, available-for-sale
 
0.6

 
7.8

Realized losses on sale of investment securities, available-for-sale
 
(0.7
)
 
(0.8
)
Income from investments in equity method investees
 
34.2

 
24.8

Other-than-temporary impairment of investments
 
(0.3
)
 
(0.4
)
Losses on investments of consolidated SIPs, net
 
(29.9
)
 
(5.7
)
Foreign currency exchange gains, net
 
19.8

 
3.5

Other, net
 
4.4

 
2.2

Total
 
46.1

 
30.5

Interest Expense
 
(13.3
)
 
(12.0
)
Other Income, Net
 
$
32.8

 
$
18.5

Substantially all of the Company’s dividend income and realized gains and losses on sale of available-for-sale securities were generated by investments in its nonconsolidated SIPs. Interest income was primarily generated by trading investment securities and cash equivalents. Proceeds from the sale of available-for-sale securities were $8.6 million and $106.6 million for the three months ended December 31, 2016 and 2015.
Net gains (losses) recognized on the Company’s trading investment securities that were held at December 31, 2016 and 2015 were $0.2 million and $(5.7) million. Net gains (losses) recognized on trading investment securities of consolidated SIPs that were held at December 31, 2016 and 2015 were $(18.5) million and $2.3 million.

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Note 12 – Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component were as follows:
(in millions)
 
Unrealized
Gains (Losses) on
Investments
 
Currency
Translation
Adjustments
 
Unrealized
Losses on
Defined Benefit
Plans
 
Total
for the three months ended December 31, 2016
 
 
 
 
Balance at October 1, 2016
 
$
6.8

 
$
(346.1
)
 
$
(8.1
)
 
$
(347.4
)
Adoption of new accounting guidance
 
(6.8
)
 
(0.3
)
 
—

 
(7.1
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications, net of tax
 
(2.6
)
 
(60.9
)
 
—

 
(63.5
)
Reclassifications to net investment and other income, net of tax
 
0.2

 
—

 
—

 
0.2

Total other comprehensive loss
 
(2.4
)

(60.9
)

—


(63.3
)
Balance at December 31, 2016
 
$
(2.4
)

$
(407.3
)

$
(8.1
)

$
(417.8
)
(in millions)
 
Unrealized
Gains on
Investments
 
Currency
Translation
Adjustments
 
Unrealized
Losses on
Defined Benefit
Plans
 
Total
for the three months ended December 31, 2015
 
 
 
 
Balance at October 1, 2015
 
$
19.3

 
$
(327.8
)
 
$
(5.7
)
 
$
(314.2
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications, net of tax
 
0.8

 
(23.6
)
 
0.6

 
(22.2
)
Reclassifications to net investment and other income, net of tax
 
(6.7
)
 
—

 
—

 
(6.7
)
Total other comprehensive income (loss)
 
(5.9
)

(23.6
)

0.6


(28.9
)
Balance at December 31, 2015
 
$
13.4


$
(351.4
)

$
(5.1
)

$
(343.1
)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
In this section, we discuss and analyze the results of operations and financial condition of Franklin Resources, Inc. (“Franklin”) and its subsidiaries (collectively, the “Company”). In addition to historical information, we also make statements relating to the future, called “forward-looking” statements, which are provided under the “safe harbor” protection of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “could,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “seek,” “estimate” or other similar words. Moreover, statements that speculate about future events are forward-looking statements. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. You should carefully review the “Risk Factors” section set forth below, which describes these risks, uncertainties and other important factors in more detail.
While forward-looking statements are our best prediction at the time that they are made, you should not rely on them and are cautioned against doing so. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They are neither statements of historical fact nor guarantees or assurances of future performance. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. If a circumstance occurs after the date of this Form 10-Q that causes any of our forward-looking statements to be inaccurate, whether as a result of new information, future developments or otherwise, we do not have an obligation, and we undertake no obligation, to announce publicly the change to our expectations, or to make any revision to our forward-looking statements, unless required by law.
The following discussion should be read in conjunction with our Form 10-K for the fiscal year ended September 30, 2016 (“fiscal year 2016”) filed with the U.S. Securities and Exchange Commission, and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

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OVERVIEW
We are a global investment management organization and derive our operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide t